Based on the calculations @raz made, we’d need to increase fees exponentially to make it worthwhile for node owners, whose earnings from prv mining are uneven on a monthly basis.

The current approach relies on the price of the token increasing (due to low supply and staking lockups) which gives the impression that the economic model is based on the greater fool theory rather than sound policy that rewards node owners for greater network activity.

At current transaction fees billions of transactions might be required to even make a difference to node owners.

The price of prv won’t appreciate forever.

What happens when the market dumps? Is there any reason for node owners to continue staking when their earnings are so small?

Right now prv seems based on ponzi economics rather than fundamentals.

So, let’s talk about transaction fees and why blockchains have them in a systematic fashion.

There are three questions to ask about transaction fees:

Are fees necessary at a protocol level?

What behaviors do fees encourage/discourage?

Do fees encourage long-term success or not?

Let’s answer those questions related to IOTA.

1. Are fees necessary with IOTA?

This may have changed, but the basic premise of IOTA is that people using the network act as miners: " Each transaction coming in must first verify two other transactions on the ledger." This means that rather than just using the network, IOTA users are also helping to mine transactions, performing work on the blockchain in exchange for access.

This is why IOTA has no transaction fees because there is a “cost” in processing power added to the network to use it.

2. What behaviors do fees encourage/discourage on IOTA?

Because IOTA has no fees (because users are performing work on the network), even spammers can help the network by performing mining. So, the “fee” is computational power, rather than crypto.

Do fees encourage IOTA’s long-term success?

There are no fees on IOTA so its longterm success is getting people to use the network to perform work and process transactions.

So, the argument that IOTA is successful and does not have fees does not take into account the fundamentals of the IOTA network and why fees are unnecessary when the “costs” of using the network are paid in computational expenses.

Now let’s look at traditional blockchains: Bitcoin and Ethereum.

1. Are fees necessary on Ethereum and Bitcoin?

Yes, fees are necessary because they discourage abuse of the network and pay miners for the costs they have due to helping to secure and run the network.

2. What behaviors do fees encourage/discourage on Bitcoin and Ethereum?

Fees ensure that miners are paid for processing transactions and discourage spamming the network.

3. Do fees encourage the blockchain’s long-term success?

On Ethereum, the network is moving toward a system where transaction fees are collected and a portion burned to reduce issuance. But, fees are still being charged and users can “tip” miners to make sure their transaction is processed faster.

On Bitcoin, the thinking is that once issuance declines, transaction fees will be enough (due to the high price of the Bitcoin token) to secure the network. If BTC is $100k, then transaction fees will compensate miners when new bitcoin is issued.

Now, let’s ask these questions of Incognito.

1. Are fees necessary with Incognito?

Yes, because miners are securing the network and they are supposed to help to compensate them for the costs associated with doing so.

However, unlike Bitcoin and Ethereum, the transaction fees on Incognito are so low as to almost be 0.

Will fees discourage spam on the network? No, because the fees are so small that people wanting to spam the network with transactions and block legitimate transactions could do so at very little cost, and miners wouldn’t benefit (due to low fees).

2. What behaviors do fees encourage/discourage on Incognito?

The main behavior the fees are supposed to encourage is node owners to support the network by running nodes to earn transaction fees. The thinking is that more transactions = more income.

At current transaction fees this argument breaks down because even with millions of transactions, nodes earn pennies.

3. Do fees encourage the blockchain’s long-term success?

In some ways Incognito is like Bitcoin. The thinking is that the higher the PRV price, the more fees look attractive.

The fact that fees are so low, makes me think that the developers of the protocol expect an exponential increase in PRV’s price.

Why would prices increase? Well, people would be encouraged to launch nodes, and stake and the price of PRV (gained through mining) would make it worthwhile.

But, there is no guarantee that the PRV price will continue to increase or even get to a level that the price is worthwhile.

The average price of a PRV transaction is very low, so PRV’s price would have to increase by 100x at least to make these fees even worth it for miners.

So, higher fees (which could still be low compared to Ethereum and Bitcoin), would make the economic case for staking stronger (fees are independent of the price of PRV) and secure the network’s health long-term (because people could calculate their ROI using the transaction fees to see if their basic node operation costs would be met).

So:

-We can’t compare Incognito to blockchains like IOTA that have zero fees because there’s a reason their fee model exists and it has everything to do with how the blockchain was designed at the protocol level. Making surface judgments about other blockchains is a mistake.

-Relying on token price appreciation (due to people locking PRV into nodes and staking) and speculation = a Ponzi because the first people on the ride benefit the most, but the last ones in don’t

-Creating a sustainable fee structure where node operators could know that higher use of the network = greater fees aligns incentives and removes the success of the network from being overly dependent on PRV price appreciation.

This approach may be too simple but that is what I got from the information distributed during the months I have been with the project, as testvalidator, validator, and team member)

Node owners were told to earn at least $25 a month, per node, looking at earnings for a longer period of time. I think that is happening.

The fractions of the fees are small, and don’t add up that much to the earnings yet. In a way, at the moment they don’t need to. The promise of earning is covered by the block rewards.

The privacy movement is a long-term project. The fees become important in 40 year when all PRV has been mined. (Probably a little earlier than that)

When fees are low, or non existing, now, it will help grow the user base, which is needed when the time comes that PRV makes up a lesser part of the earnings than nowadays.

The project is not aiming for just a network with users, it is aiming for global coverage network and facilitating the world. We have got a lot of growing to do. We need way more nodes online (this will keep PRV demand pretty high), and we need way more users to start using the system (the low/non-existing fees will help with that).With higher fees, we may double the promise to node owners, but will we still attract the users who we also need?

I don’t see Ponzi scheme in this scenario, but I might be missing something.

We have got a lot of growing to do. We need way more nodes online (this will keep PRV demand pretty high), and we need way more users to start using the system (the low/non-existing fees will help with that).

The block rewards by themselves are meant to sustain development because they are dependent on more people launching nodes, which locks up supply.

We’re relying on that cycle continuing, which is not healthy or sustainable. This is the very definition of a Ponzi.

We’re not talking about making fees overly high, just enough so that higher volume = greater benefits for node earners today, so that we can credibly say to new node operators that transaction fees will help them earn, no matter how much the price of PRV rises or falls.

That’s why talking about, and making tokeneconomics stronger now is required.

Node owners were told to earn at least $25 a month, per node, looking at earnings for a longer period of time. I think that is happening.

The fractions of the fees are small, and don’t add up that much to the earnings yet. In a way, at the moment they don’t need to. The promise of earning is covered by the block rewards.

My viewpoint on this matter is in line with Jamie’s here. Node owners are right now compensated by block rewards. Earning on transaction fees is basically irrelevant at this point, especially in comparison to what’s already being earned in block rewards.

That being said, I’m still not opposed to raising fees at some point, in line with @raz and his proposed fees – but with a longer term outlook. At the present time, it’s not that important, and what Jaime said here is my thoughts exactly:

Jamie:

With higher fees, we may double the promise to node owners, but will we still attract the users who we also need?

Conclusion: Eliminating transaction fees for right now could be a good way to attract Incognito network users, even if just as a PR tool, and at the present time, this has no noticeable effect on Node owners. Longer term, as the Network grows, there should be an increase of fees, per @raz.

As I know, the transaction fee is not static in Incognito. Depending on the congestion, the fee is increasing or decreasing (like Ethereum). This happened so clearly once the team run a contest over the number of the transactions. Personally, I do not like this dynamic fee scheme. A fee should be taken somehow. Zero fee (NEO) or fee-less (EOS) schemes have faced spamming. They found or try to find some solutions for this problem. However, I’m not on this issue. The scalability problem will be solved eventually.

Bitcoin may survive as a store of value even if it does not find a solution for the dapps. However, the others (ETH, EOS, NEO, TRON, Tezos etc.) are the banks/infrastructure of the new decentralized and automated finance. Incognito is the same + privacy-borne. Eventually, they will go into a hard competition in terms of the costs to the users (dapps and their users). Unless a financial infrastructure is in a niche field, I do not think it can survive by increasing its fees instead of growing its usage.

As for the node owners, to my rough but very conservative calculation, I think they will not face any problem about the profit up to the end of 2023. In fact, imho, I do not foresee any problem with this subject for at least 5 years (except acts of God ). I think, to talk about the fees, we should observe the growth of the ecosystem for 1-2 years. During this time, the voting mechanism will be mature. After that, the node owners may decide what they want via voting.

What I was saying is, we can afford low fees now because there will be a demand for PRV and with that a reasonable price, and with that a reasonable earning.

Sacrificing fee income now, to attract users.

Shift the lever when the time is right. When PRV value lowers because we are reaching the limits of what can be done network wise with the PRV already mined, years from now, we will hopefully have attracted millions of people, who love to use the project and therefor don’t mind increase of fees. Especially since it has been this low for so many years already.

In short I am not describing a cycle, I am describing a straight line where balance between block production earnings and fee earnings will shift.

We can put a million nodes online, but if we have no transactions to process, there is no use for them. We need both nodes and users, a new balance will need to be found on a more or less regular basis.

-Exposing too much information about transactions and transaction activity on the blockchain: For example if I deposit 30,000 USDC into the system and then make $30,000 of trades, due to the information that’s exposed right now in the blockchain its’ easy to track: external wallet --> internal PRV transaction --> likely wallet owner; this is the opposite of privacy

-Incognito network failures; The network has gone off line several times since I’ve been following the project. Whether this is due to centralization in the core infrastructure, constant protocol upgrades, code bugs etc., this is unacceptable

It’s essential that we create a fee model that makes sense so that node operators aren’t overly exposed to market speculation and we assume that PRV token prices will continue to rise, even over a 12 month period. The crypto market is crazy. We could dump by 90 percent in price, but have the same amount of transaction volume. This is the scenario we’re trying to guard against.

Like I said, right now Incognito has Ponzi economics, not solid tokeneconomics.

@andrey is working on a model right now to scale fees so that, in comparison to other networks, they are modest, but node operators have steady, reasonable source of income from fees, that protects them from the effects of market speculation. I don’t want to rely on the price of PRV rising as a reason to encourage people to become node operators. Because that’s just pure speculation rather than an argument on the fundamentals: as Incognito is used more often, your earnings will rise. That provides a foundation to the PRV price and makes it worth it to those who are more ROI oriented.

Finally, privacy is a high-value feature. Charging for it makes sense.

I look forward to seeing that model. Then @raz can provide feedback and we can put a system in place that can be adjusted as the network scales.

I think you use too much an offensive tone, what could pull back the conversation on this topic.

@Mike_Despo Blockchains normally are not such things we change later. The question of fees is urgent because the later we raise fees, the harder it is to accept.

@Jamie I am personally worried about what will happen 40 years later or just a few decades when people realize what will happen 40 years later. I believe trillions of transactions per month is not realistic, the current model is not economically viable and will let the network die in a few decades. It probably doesn’t affect me, because I plan to sell sooner, but I don’t want to leave a legacy in this community without trying to incentive the core team to fix this.